From the Center for Responsible Lending: a resource for predatory lending opponents.
Loans Secured by Car Titles Trap Borrowers in Cycle of Debt
April 14, 2005
Today the Center for Responsible Lending and Consumer Federation of America issued a first report on the car title pawn/loan industry, titled "Car Title Lending: Driving Borrowers to Financial Ruin." The report describes the title loan product and industry, illustrates predatory aspects of these over-secured small loans, and makes recommendations for stronger protections for borrowers.
To get a title loan, borrowers sign over the title to a paid-for car and, in some states, provide the lender with a spare set of keys. The loan is usually due within a month in a lump-sum payment, making it difficult for families to repay the loan. Borrowers often find themselves "rolling over" these loans repeatedly - paying huge amounts in interest and fees while barely touching the principal. Since car title loans are typically made for a fraction of the value of the car, the lender is well-protected if the borrower fails to make the full payment at the end of the month. In some states, title lenders are allowed to keep the surplus from the sale of the car, allowing title lenders to reap a windfall from the borrower's default. In many cases, the lender repossesses the car after the borrower has made substantial payments. That can be devastating because a car is often the borrower's largest asset and his or her only way to to get to work.
If states permit the loan product, CRL and CFA recommend that they adopt strict requirements to protect borrowers from abuses, including:
Establishing fair and affordable loan terms
Protecting borrowers after a default
Closing loopholes to ensure consistent regulation
Closely monitoring lenders
Ensuring that borrowers can exercise their rights
For the full report and additional information on car title lending please visit the our website
About the Center
The Center for Responsible Lending is a national nonprofit, nonpartisan research and policy organization dedicated to protecting home ownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development lenders.